Inflation at 15-month low of 3.36%; may fall below 1% by March

Inflation at 15-month low of 3.36%; may fall below 1% by March
The Financial Express, February 27, 2009, Page 2

fe Bureau

Inflation fell sharply by 56 basis points to a 15-month low of 3.36% for the week ended February 14, raising expectations of rate cuts from the Reserve Bank of India. With the government already announcing a 2% cut in service tax and excise duty, the action is now expected to shift towards the RBI. Inflation stood at 3.92% in the previous week.

Analysts now expect inflation rate to fall below 1% by March end, while RBI has targeted an inflation of 3% or lower. The second round effects of the fuel price reduction announced earlier has lowered the pace of price rise of various commodities. While most products including food and manufactured items turned cheaper, some luxury items like wine became expensive. The wholesale price index-based inflation is at its lowest since November 24, 2007 when it stood at 3.11%. Inflation for the week ended December 20 was revised to 5.91% from 6.38%, indicating a sharper reduction in inflation numbers than reflected in the provisional data.

Bond yields eased marginally, with the benchmark 2018 government bond ticking down one basis point to 6.58% after the inflation data. The rupee and the stock market held steady. The yield closed at 6.51% on Thursday, down from previous close of 6.65%. The 30-share BSE Sensex ended up 0.59% at 8,954.86 points and the 50-share NSE index closed up 0.84% at 2,785.65 points. The rupee closed at 50.45/47 per dollar, from previous close of 49.96/97, as month-end dollar demand from refiners and importers coupled with non-deliverable forwards-related dollar demand weighed on the rupee.

“Inflation is drastically coming down mainly due to the second round impact of the fuel price cut. Global crude prices have fallen drastically and the government may announce another fuel price cut soon. If that happens, then inflation would fall at a much faster pace,” Bank of Baroda chief economist Rupa Rege Nitsure said.

“With inflation at such low levels, good liquidity in the system and slackening credit demand, all warrant a lending rate cut of 50 to 100 basis points by banks,” she said. After aggressive rate cuts since October, RBI’s key lending rate, the repo, stands at 5.5%, while the reverse repo is at 4%. RBI governor Duvvuri Subbarao said in Tokyo recently there was room to cut rates, but the question was when and by how much. He, however, said a fall in inflation does not automatically mean rates will drop too.

Primary articles’ inflation fell to 7.3% from 8%. Food articles inflation fell across-the-board to 9.9% in the current week compared with 10.4% last week, coming down to a single digit level. Non-food articles’ inflation fell to 2.9% compared with 3.8% in the previous week. Fuel and power’ group inflation decreased to (-) 4% from (-) 3%. Manufactured products’ inflation fell to 4.7% from 4.9%.